Beware of GST traps when selling second-hand goods

The GST law contains provisions that allow second-hand dealers to effectively claim input tax credits in respect of second-hand goods they acquire from unregistered sellers (ie. private individuals). Second-hand goods means what the name says, but specifically excludes (for GST purposes) precious metals (gold, silver, platinum), animals and plants.

To qualify for input tax credits, the second-hand goods must have been acquired for the purpose of selling them (although not necessarily immediately).
A 2009 Federal Court decision – in LeasePlan Australia Limited v FCT (2009) 74 ATR 33 – held that a company was entitled to input tax credits for its acquisition of second-hand motor vehicles (the company carried on a fleet leasing business).

In the course of its ordinary business, the company purchased, leased, managed and sold second-hand motor vehicles. The vehicles were acquired from private individuals who were not registered (nor were required to be registered) for GST. The company in turn leased the vehicles back to the individuals under either an operating lease or a finance lease, subject to certain terms and conditions. The company acquired the vehicles with the intention or purpose of leasing them back to their previous owners.

In finding the company was entitled to claim input tax credits, the Federal Court held that the ultimate sale of the vehicles was always the aim of the company and that, in fact, all relevant vehicles had been sold immediately following the expiration of their leases.

In 2005, the Tax Office had released a GST Ruling (GSTR 2005/3) in which it looked at the so-called exploitation of the second-hand goods provisions to obtain input tax credits. The claimed exploitation arose where an entity was interposed between a supplier of the second-hand goods and a recipient of those goods. The aim was to ensure input tax credits could be obtained for acquisitions of second-hand goods.

The ATO has now amended that Ruling to take account of the Federal Court’s LeasePlan decision.

The ATO says the Commissioner accepts that lessors that regularly purchase second-hand motor vehicles from unregistered lessees on lease terms that provide for a period of leasing, followed by sale, are entitled to input tax credits on the acquisition of the vehicles under the GST Act. It also says the same principle would apply if lessors in similar circumstances acquire other second-hand goods, although not in all cases where there is an intention that the second-hand goods would ultimately be sold.

The ATO, however, states that an entity will not be entitled to input tax credits on the acquisition of second-hand goods if:

• the second-hand goods are used in the entity’s enterprise; and
• the entity acquired the second-hand goods with an intention that they will ultimately be sold.

For example, a plumber might purchase a second-hand vehicle (from an unregistered person) for use in his business but might have in mind to selling it at some future time. The Tax Commissioner’s view is that it would not be accurate to characterise the plumber as purchasing the motor vehicle for the purpose of sale or exchange. On these facts, the Commissioner says the purpose is to use the vehicle in the plumber’s business.

For entitlement to claim input tax credits, the GST law requires that the second-hand goods are acquired for the purposes of sale or exchange in the ordinary course of business. The ATO considers this means that those acquiring the goods must be in the business of buying and selling these goods. If second-hand goods are acquired for any other purpose, for example, for use and eventual sale in the course of business, the ATO view is that input tax credits cannot be claimed in respect of the acquisition of the goods.

The GST law, like all tax law, is complex. SMEs in doubt of their position should take professional advice from their accountant or adviser.

Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.